So you heard ICOs are dead?

Julian Leitloff
Sep 20, 2018 · 8 min read

When I asked Fabian Vogelsteller, the father of the ICO (ERC20) standard, if he thinks ICOs are dead, he just laughed:

People were really certain that Bitcoin was dead twice and here we are — Bitcoin is alive and kicking

You might have heard the same thing: ICO funding volumes crashed compared to last year and new projects have a hard time raising ICO funding.

That is all true. But it is still wrong to assume that ICOs were a mere irrational crypto bubble. It is in fact the opposite:

ICOs are not dead.

Total volume of ICO funds raised in USD. Data from ICO Data. Own visualization. Creative Commons (BY-SA).

Let’s take it one step at a time. The hypothesis is that ‘ICOs are dead’. That is not true, as you can see in the left chart. So let’s assume ‘ICOs will be dead soon’ or ‘ICOs will become insignificant’ instead.

The first indicator we have is the total funding volume collected via token sales. The numbers show that the monthly funding volume has shrunk by nearly 80% compared to the beginning of the year — in any developed market, such a contraction would signal an enormous crisis.

There are a couple of points to be made though, that the opposite (null hypothesis) is true. Venture Capital, Withering And Dying was published in the New York Times in 2001, after the Dot-com crisis rampaged the industry. But venture capital as a form of investment did not die. It matured and cut the excesses of the past.

The price of Ethereum at the beginning of the month (left axis) and the total volume of ICO funds raised (right axis) both in USD. Data from Etherscan and ICO Data. Own visualization. Creative Commons (BY-SA).

Venture capital investment did take a long time to come back, but there is a reasonable chance that ICO volume will recover sooner. When talking to ICO investors, I realized that the market sentiment was directly tied to the crypto market. “I have taken a hit, so I am not investing at the moment”, was a regular reply. I did not expect a highly significant positive correlation of 0.8 between rising Ethereum prices and total ICO funds raised. Should we see rising Ethereum prices, we will likely see an equally strong recovery.

Sample distribution of contributors by numbers of entities and individuals. Even distribution among countries is a result of a free market access. (Creative Commons (BY-SA).

However, there is a place where ICOs are assuredly not going to see a rebound due to increasing ETH prices: China. The Chinese government forbade token launches last year. So there is a risk of ICOs dying because of regulation, even though this is not the reason usually brought forward.

That the ICO train continues without one of its biggest contributor bases, showcases its anti-fragility: ICOs are truly international funding events.

Even if one jurisdiction is weakened or cut from access due to a regulatory crackdown or a financial crisis, it has limited effects on ICO funding as a whole. If the rumours are true that China is going to lift the ban soon, many contributors will soon be able to come back to the market.

ICOs are not IPOs on the blockchain.

We have talked a bit about a potential come back of token launches. We should also mention the positive effects of the downturn: With less easy money in the market, many weak and scammy projects disappear. Investors, who funded without due diligence or any expertise, are off licking their wounds. The sophisticated investors that remain require a higher bar when it comes to evaluating new protocols. These investors now find less competition and ‘noise’ polluting the market.

There are a couple of misunderstandings around ICOs. ICOs sometimes are considered IPOs on the blockchain, but without the regulatory compliance. ICOs are an inherently different game and few people really get that.

As always, Trent does when he succinctly writes:

What he means is that true blockchain protocols are open source projects that enable a zero-margin economy. Open Source used to be a red flag for venture capital investors. Even the most successful companies behind open source products like Red Hat (Linux) or Automattic (Wordpress) do not show the typical unicorn metrics that you would expect from a company serving half of the internet.

ICOs for the first time change that. They incentive us as a society to build more of these zero-margin public utility networks. While IPOs issue stocks that require a capital reflux (thus the discounted cash flow valuation method), ICOs issue tokens that are future consumption rights based on the utilization rate of the network (thus the Burniske currency valuation model).

An ICO finances an international standardization effort using an open source zero-margin protocol. These tokens represent consumption rights and are pre-sold to incentivize the usage of this protocol and reward early backers of the public utility network. The price of tokens increases with higher utilization of the network, making adoption a prime target for backers, while disregarding the ability to capture parts of the value created.

The most surprising part is that the structuring of ICOs fit the general incentive model of investors a lot better. As the title already reveals, Sullivan and Miller ‘s (1996) research “Segmenting the Informal Venture Capital Market: Economic, Hedonistic, and Altruistic Investors”, points out over twenty years ago that the rational profit-driven investor type does not give the full picture. There are other motives out there and token issuance aligns these three investor types well. The research has been done for Angels Investors, but my own research reveals the pattern is apparent in Equity Crowdfunding markets too, and can be well observed in the ICO space.

So if you are an open source blockchain protocol, or you are aiming to become one, and you are looking to issue future consumption rights to your open source network – an ICO is probably a pretty good idea. If you are an existing company who wants to raise funds to invest, or if you are looking for alternative options to an IPO, you should stay away from ICO’s - Especially if you launch a coin that is restricted to your own ecosystem.

ICOs are superior to traditional financing: We will see ICO volumes explode.

We have established that ICOs are a very different type of funding method only open to a subset of tech companies. ICOs are not available for businesses that have a regular discounted cash flow product or service approach. Don’t get me wrong, there is nothing wrong with these businesses, in fact, Fractal is one of them.

So what about all the talk about security tokenization then? Well, different from what Trent sketched out, I see a huge benefit in transferring ownership rights from plain paper (stocks, loan contracts) onto the blockchain.

To be clear though: This has nothing to do with the current ICO market, as there are no operational issuers, exchanges, custodians or pretty much any of the needed infrastructure to make that work. I am not the only one who is convinced: Neufund is working on tokenizing startup equity building and issuance and exchange infrastructure, and many other well-funded projects too.

I agree that building public utility networks is the endgame. I believe that as a society we have found a very powerful technology that incentives us to build zero margin public utility networks that will enable a — what Trent calls– an economy of plenty. However, not everyone can start a global standardization effort and there will be a parallel tokenization effort needed to open up traditional finance.

Looks a lot fancier than a digital token: A bond issued by the Dutch East India Company (VOC), which was the first company in history to issue public debt and equity shares and establishing a public market to trade them. (Public Domain)

So instead of having a physical piece of paper as evidence of an ownership share, (which was innovative when the Dutch East India Company first IPOed in 1602) digital tokens can represent a digital ownership right or a right to receive interest or a part of the profit.

So replacing the physical with a digital representation of ownership sounds like a good idea, but not too exciting after all. But I think it will change the way finance works for the better.

Here’s why:

Equity and Debt tokenization protocols will create truly international capital markets and enable a more efficient distribution of capital that will be a lot cheaper. Finance protocols will bring the concept of open source into the finance world, simultaneously reducing transactions cost dramatically and getting rid of powerful gatekeepers. Standardization will further enable a more rapid availability of capital and open up regular finance requests to a worldwide supply of money. Smart protocols will enable new forms of financing bringing a new wave of innovation and enable the measurement and incentivization of social goals into the quantitative world.

Again, one step at a time:

“There is no better alternative to crowdfunding, with potentially more transparency, better control mechanisms and automation”, Fabian Vogelsteller says. There is no better alternative to traditional finance, I would add.

Financial protocols are superior to our legacy financial infrastructure. It exhibits the features that are 5x better to drive adoption on a large scale. Financial protocols will bring open source to the financial world, an industry plagued by crisis and scandal.

It is not a question of if, but when, these new tools will become available.

The infancy of the ICO market is over, the next wave is coming

The market for financing public utility networks has undergone a self-cleansing process and gotten rid of the scam and low-quality projects in the meantime. It is set for a dramatic rebound as crypto prices recover and China returns to the market. There still is a great need for new zero margin protocols, but the technology is sound.

In addition, there will be a new wave of security tokens that act like normal stocks and loans, fueling a new but different wave of ICOs.

Eventually, as financial markets adapt, an ICO will not be a noteworthy event.

An ICO will be as common as closing a startup seed round or signing a housing loan.


Building ID + Payment solutions for the Web 3.0 with a focus on usability and compliance

Julian Leitloff

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Co-founder & CEO of Fractal. Building ID & Pay solutions for the Web 3.0 with a focus on usability and compliance.



Building ID + Payment solutions for the Web 3.0 with a focus on usability and compliance